Monday, July 18, 2011

Start young – the value of saving and investing NOW!

You’re twenty-one, newly graduated, starting a career, with a few dollars of your own money in your pocket for the first time, and solid prospects of more to come for a long time. What to do with that money? Save for a trip to Europe? Buy that new car? Or get a head start on your retirement portfolio?

Who’s thinking about retirement at twenty-one? If you’re not, you’re far from alone. A recent survey1 found that Canadians aged 18 to 34 were among the least likely to have contributed to an RRSP for the 2009 tax year at 29 per cent, compared to the national average of 36 per cent. The same was true of TFSAs – while 32 per cent of all Canadians had opened a TFSA as of March 2010, less than a quarter (23 per cent) of those aged 18 to 34 had opened one.

Sure, it’s always difficult to save for the future – especially for young Canadians, often strapped for cash, with student loans to pay off, and lots of new expenses to support their new lifestyle – but the experts and many years of investing experience tell us in no uncertain terms that starting young – even if you have to start small – is the key to investing successfully for retirement. Think of it this way: You’ll be working for between 30 and 40 years so you should get your investments to work as long as you’re working for your retirement.

The longer you are in the markets, the more your savings will grow over time. Slow and steady can win the race to a comfortable retirement – here’s why:

  • Mary invests $2,000 at the beginning of each year between ages 21 and 29, for a total of $18,000 over nine years. Assuming a pre-tax return of 7 per cent, by age 65, she will have $315,675 in savings.
  • Lynn also invests $2,000 at the beginning of each year with the same pre-tax returns but starts at age 30. To get near Mary’s savings total of $315,675, Lynn will need to invest nearly four times as much -- $70,000 over 35 years.
And here are some investing tips to get you going:

  • Are you investing to buy a house or for retirement? Knowing where your money’s going will help you define how to invest.
  • Do your research. You need to be comfortable with your investments and the best way to do that is to become knowledgeable.
  • Talk to a financial planner. Even if you only have a little money to invest, a financial planner will be happy to help you. It’s in their interest to establish a relationship with young investors who will be clients for a long time.
It’s always profitable to start investing early and developing good financial habits. That way, you’ll have more options for how you want to live your life from here to retirement … and beyond.

1Investors Group RRSP Exit Poll (Harris Decima, March 5, 2010)

Thursday, July 7, 2011

Decisions, decisions – is it better to contribute to investments held within an RRSP or a TFSA?

You have limited funds and you’re wondering whether it’s better to put them in your Registered Retirement Savings Plan (RRSP) or in a Tax-free Savings Plan (TFSA) eligible investments.  That depends on two factors:

  1. How frequently the funds will be removed from and re-contributed to either investments within an RRSP or TFSA in the years leading up to your retirement. If you are going to need the funds prior to retirement and intend to re-contribute them at a later date, a TFSA may be the better option because you can make withdrawals at any time and the contribution room is restored; but when you make RRSP withdrawals, you lose that contribution room.
  2. What your marginal tax rate is today and what your marginal tax rate will be when you finally remove the funds. Generally, if your marginal tax rate is lower at the time the funds are removed from your registered plan at retirement, the RRSP option will usually produce a better result – but that is only true if your marginal tax rate actually is lower.

    Your marginal tax rate can be influenced by income-tested benefits including the Age Credit, Old Age Security (OAS), the Guaranteed Income Supplement (GIS) and the GST Credit. Because they are income-tested benefits, they are reduced or clawed-back as your income increases, ultimately disappearing entirely at an upper threshold that is different for each of the benefits. If the funds you remove from your RRSP after age 65 increase your taxable income and result in the loss of some or all of your income-tested benefits, you will have effectively – and perhaps substantially – reduced your income and increased the tax you pay. And you would have cancelled out some or all of the value of your RRSP withdrawal.
There is no doubt that RRSPs and TFSAs play key roles in financial and retirement planning and there are strategies – like income-splitting – that you can use to reduce your taxable income and avoid clawbacks. Your professional advisor can help you decide what’s best for your situation.